Has anyone transferred their student loan debts to credit cards to file BK?

[THavelford]

My credit is not totally ruined yet and I have room to transfer all my student loans to multiple credit cards; my student loans were delinquent before I applied for for a deferment and now hospital bills have begun to go into collections. I'm not behind on any other loans. I owe 70K on student loans. I've ran the numbers and there is no way I can pay my student loans without causing me undue hardship which will cause me to get behind with my other debts, especially my mortgage. Has anyone done this before?

[debee]

If you are asking about whether or not anyone has paid off their student loans with credit cards and subsequently filed bankruptcy, then yes. That's happened.

If you are asking about whether or not anyone has done it in anticipation of filing bankruptcy, that's happened too but then it's called fraud.

Some people have done it successfully. Others have had the credit card company file an objection to the discharge of that debt. Nondischargeable debts are still nondischargeable even when paid by credit card.

[MSbklawyer]

The people who have done this successfully do it NOT by simply transferring the balance. As debee noted, that's going to raise red flags. Instead, they did it by using their credit cards to pay everything else: house payments, car payments, grocery bills, utilities etc. And by using the money that would normally go to those things to pay student loans. That way, "Sallie Mae" doesn't show up on the credit card statements.

[debee]

LOL. I wasn't going to let the cat out of the bag, but since it's out I may as well say that all the successful cases I've read about all involved cash advances with all the monthly cc payments met & looooong waits between loan pay-off/cash advance and filing.

Of course there's the risk that you get asked what you did with the money. Or, as in MSbklawyer's example, you get asked what you were doing with your income during the time period when you met all your expenses with credit cards.

But as MSbk says, if it states "Sallie Mae" on your credit card statement, expect an objection.

[KeithDoxen]

It seems that one of the obvious problems the OP would have here, other than the whole "this smells a lot like fraud" issue, is how he or she would obtain 70k worth of credit in order to make the cash advance scheme work. It seems that would be a mighty sum, even back in the boom days, when they handed out loads of credit just for being alive.

[HHM]

It's pretty much fraud, no matter how you slice it. And if you really do it for all $70K, we are talking criminal prosecution for BK fraud.

Sorry, no free lunch in BK. There is no effective (i.e. non-fraud) way to turn a non-dischargeable debt into a dischargeable debt.

[SweetGeorgia]

OP, it might be a better idea to consolidate all your loans with the Department of Education - if you can, and if they still offer that. Sallie Mae is a private company, and forbearance/deferral is VERY limited (and getting more limited all the time because COLLECTION is what increases shareholder value). They actually say that in their SEC documents.

The Department of Education is easy to reach, easy to work with, and are much more flexible about payment. There are income based repayment plans, minimum (stretch it out) payment plans, and I was even in a forbearance plan when I was younger for about 2 years where they just ASK "what can you pay?" and I sent $25/month.

And the DoE can give you a straight-up forbearance (no payments, interest accrues) if you need it for a much longer period of time.

[dspii]

I agree with SweetGeorgia....the DOE is much easier to work with and has a lower interest rate, right now. And, if you have to file BK that payment history helps rebuild your score...it did mine!

[nc73]

Wish I'd done it but it's too late. Hadn't planned on filing last year.

[chrisdfw]

I got a 0% for life credit card offer for a balance transfer (long time ago, when there were also no transaction fees) and did pay off both a vehicle and a student loan with a cash advance check. The purpose was not to make a non-dischargeable debt into a dischageable debt, but that was the effect, along with not ending up with a secured debt on the vehicle. It happened long before I was laid off and the purpose was to get lower (0% is really low) interest rates and save some money.

I would think that since you are considering bankruptcy it would be considered fraud. I'm pretty sure of it. If you do something that would clearly be inadvisable but for the bankruptcy, that would be bad.

[GoingDown]

The people who have done this successfully do it NOT by simply transferring the balance. As debee noted, that's going to raise red flags. Instead, they did it by using their credit cards to pay everything else: house payments, car payments, grocery bills, utilities etc. And by using the money that would normally go to those things to pay student loans. That way, "Sallie Mae" doesn't show up on the credit card statements.

I wouldn't think this would be considered fraud.

And if they put plenty of time between the last use of their credit cards and when they file, say 3 or 4 years, or so, I really doubt anyone is going to look into it even possibly being fraud. No one is going to care by that point in time.

[chrisdfw]

I wouldn't think this would be considered fraud.

And if they put plenty of time between the last use of their credit cards and when they file, say 3 or 4 years, or so, I really doubt anyone is going to look into it even possibly being fraud. No one is going to care by that point in time.

Its fraud if you do it with the intent, which is hard to prove, I would definitely consider paying the student loans and not paying other debts, but we should nto encourage anyone to borrow if they already plan to file bankrupty, I know you wouldn't suggest that, but want to be careful.

[HHM]

I love it when people say intent is hard to prove, the opposite is true. You don't really need to "prove" the state of mind. The burden of proof in BK court is merely the preponderance of evidence, which simply asks, is X fact more "likely" true than false. You can prove intent via circumstances. The OP's circumstances would be EASY to prove fraud, insolvent at time of transfer, no justifiable basis for making the transfer, loans already in default. The other sticking point is that although the burden of proof is on the creditor/trustee, in the reality of the court room, the debtor needs to present an alternative explanation for why it was "reasonable" to do the transfer.

But as in Chrisdfw's circumstances, that is a bit more plausible. But in general, it is never a good idea to put student loan debt onto credit cards unless you had a 0% for life type of offer (but even that offer can be revoked in the event of default). At least with student loans, the interest rates are relatively low and there are some special options for dealing with them (assuming federal student loans).

[chrisdfw]

I love it when people say intent is hard to prove, the opposite is true. You don't really need to "prove" the state of mind. The burden of proof in BK court is merely the preponderance of evidence, which simply asks, is X fact more "likely" true than false. You can prove intent via circumstances. The OP's circumstances would be EASY to prove fraud, insolvent at time of transfer, no justifiable basis for making the transfer, loans already in default. The other sticking point is that although the burden of proof is on the creditor/trustee, in the reality of the court room, the debtor needs to present an alternative explanation for why it was "reasonable" to do the transfer.

But as in Chrisdfw's circumstances, that is a bit more plausible. But in general, it is never a good idea to put student loan debt onto credit cards unless you had a 0% for life type of offer (but even that offer can be revoked in the event of default). At least with student loans, the interest rates are relatively low and there are some special options for dealing with them (assuming federal student loans).

When I say intent is hard to prove, I mean in general, but we infer intent from actions and without a reasonable alternative explanation, one is left to assume fraud. I think the people who would transfer student loans to credit cards while insolvent are the same ones that run every card to the limit. That is pretty powerful evidence of intent.

There are great options for dealing with student loans, as you said, assuming we are talking federal and not private, private student loans are HORRIBLE.

Income based repayment is very powerful, and whatever is not paid in income based repayment is forgiven in 25 years or 10 years for those who qualify for public service loan forgiveness, which included all public workers and those who work at a non-profit, including universities, city, state local government, etc.

The payment is less than 15% of income, soon to be 10% for future loans. The payment is 15% (10% for future debtors) of the difference between adjusted gross income and 150% of the poverty line, and can be zero. Even those payments that come out to zero count towards the 10 or 25 years. Anyone making less than 150% of the poverty line has a payment of zero. It shields very low income workers from paying much, everyone else pays some, but always less than 15% of income. The figure used is adjusted gross income, so after retirement contributions, medical premiums, etc. Its a very good program and for most people makes it harder to claim much hardship.

I'll give myself as an example, even after paying off my highest interest student loan with a BT, I had some undergrad loans, and took out more graduate loans to the tune of over 180,000, much of it taken when I realized I would be eligible for public service loan forgiveness and income based repayment.

My gross income is between 160 and 170 thousand, so this is not just a program for the desperately poor. Because of medical premiums, pension deductions (6% of income), 457 and 403b plans (15% of income), my adjusted gross income is about 110,000. Based on that I pay just under 1000 a month. After 9 more years, the balance (projected to be 70,000 or so) will be forgiven. 95% plus of the jobs in my career field are for non-profits and government.

In addition to fraud charges, possible non-dischargeability actions, you lose these options if you go to a credit card. To me its not worth the risk, if I knew about it when I transferred one of my student loans to a zero for life credit card, I never would have done it. I would have come out ahead leaving it with the others since my payment would not change (based only on income, not balance) and it would only result in a large balance being discharged at the end of 10 years. Even though the credit card was discharged, I really gained nothing, since it would have been discharged under public service loan forgiveness anyway. Actually I did end up paying some payments that I would not have had to pay if I had left it alone, maybe 2-3 thousand worth, so even in the best case scenario, no fraud, no interest, I didn't come out ahead. MY example is just that, an example of paying off a student loan with a credit card, where it was not fraud, I had a legitimate reason (I thought so, but was wrong) and I still didn't come out ahead. Perhaps my post made it sound like a good idea, I should have said that it wasn't. I was fixated on low interest and lost sight of the big picture.

As HHM pointed out, there are great options for dealing with federal loans, I think for most people, 15% or less of disposable income is a fair way to deal with the debt, the first portion is shielded completely by the 150% of poverty line deduction, and pre-tax deductions for medical and retirement further protect some income. During unemployment or very low income periods, the payment can be zero, and it still counts as a payment for foregiveness purposes. I think student loans can be a problem for many people, but this program goes a long way to eliminating the hardship for most people. We did borrow the money and 15% or less (often much less) payback does seem like a small sacrifice. A family of 4 making $40,000, with retirement and medical premium deductions of 5000 a year, would have a monthly payment of $20! That is regardless of balance! If they put another 2000 into their 401k plan, they would have no payment due at all!

Don't jeopardize this goodness with potential credit card fraud.

[HHM]

good points, also, this issue has come up in analogous issues, refinanced and consolidated student loans are still considered student loans for BK purposes. If you look at the IRS 221(d)(1), part of the definition of a "qualified education loan" expressly includes, "indebtedness used to refinance indebtedness which qualifies as a qualified education loan". See also CFR 1.221-1(e)(3)(v). [CFR = Code of Federal Regulation). In common sense terms, if you refi a student loan in anyway (e.g. put it on a credit card) it is still a student loan for BK purposes.

There is a possible argument that if you do refi to a credit card, that the loan loses the qualification as a loan "solely" for an education purpose, but no court has ruled on that issue that I know of and other opinions that broach that issue are hostile to the debtor.

I still think chrsdfw, that you are still in a deep gray area, if the creditors tried to collect, you would probably be forced to reopen your BK case and litigate it, and would probably lose.